The Six Rules of Successful Mutual Fund Investing: Part Five

Part Five of the six part series on successful fund investing touches on the importance of diversifying your funds and allocating assets.

The Fifth Rule of Successful Mutual Fund Investing:

INTELLIGENTLY DIVERSIFY YOUR FUNDS AND ALLOCATE YOUR ASSETS

Do not use a scattershot approach to diversification in your fund portfolios. You need a smartly devised and clearly delineated plan of attack that breaks down the percentage into which you’ll be investing in different fund categories, such as by company size or area of the world.

For many investors, a straightforward and sensible diversification plan will include funds that include companies of all sizes (small, midsized, and large) as well as companies inside and outside the U.S. Depending on your age and risk tolerance, you may wish to add a certain percentage of bond funds or income funds to the mix. Then, you might choose to use a small percentage of your portfolio to explore other areas with the use of sector funds or region funds.

Myriad resources exist to assist you in building a plan for your portfolios, and you would be wise to avail yourself of those tools and other research to determine the best mix for your own needs.

In any event, avoid choosing mutual funds as you would at an all-you-can-eat buffet restaurant, piling on your plate a little of this and a little of that with no regard for how those funds come together in a sensible plan.

Did you know that nearly 50 percent of the sales and profits owned by companies in the Standard & Poor’s 500 index come from outside the United States? Simply by owning a mutual fund that tracks the performance of the S&P 500 may be providing you with all the exposure to global economies in the developed world that you need in your portfolio. Adding an international fund to the mix may tip your exposure to non-U.S. business beyond your expectations.

You can avoid this kind of problem by always knowing what your fund owns. Don’t rely on a fund’s stated investment style and objectives to convey the actual securities held in the mutual fund. Fortunately, you can learn more about any fund by studying its publicly provided reports or using mutual fund analysis tools such as those provided by BetterInvesting.org.

Next blog will cover rule #6: “Concentrate your portfolio in just a handful of funds.”